The company released the third quarter of 23 financial report, profit end pressure, performance slightly lower than market expectations. 1) 23Q1-3 revenue 4.22 billion yuan, yoy-2.3%(according to the company's 23Q3 financial report, the same below); net profit attributable to mother 510 million yuan, yoy-24.1%. Deducted non-parent net profit of 430 million yuan, yoy-28.0%. 2) Q3 revenue 1.15 billion yuan, yoy-17.3%, parent net profit 90 million yuan, yoy-56.0%, deduction of non-parent net profit 70 million yuan, yoy-61.5%. Affected by the decline in the price of skin care products caused by weak consumer demand in Q3, at the same time, the Company made strategic adjustments to the product sequence and sales channels of skin care products internally, and the external environment + internal adjustments affected the performance of Q3.

Strategic personnel adjustment and continuous R & D investment affect net interest rate, and the improvement of investment efficiency helps to control sales expense rate. 1) Q1-3 gross profit margin 73.1%, down 4.2pct year-on-year, of which Q3 gross profit margin 71.1%, down 5.7pct year-on-year. 2) 23Q1-3 net interest rate 12.0%, down 3.4pct year-on-year, of which Q3 net interest rate 7.5%, down 7pct year-on-year. 3) The sales expense ratio decreased by 1pct to 46% on Q1-3 23, which was due to the company strengthening the monitoring of platform traffic and reducing its dependence on super anchor. The management expense ratio/R & D expense ratio increased by 1.3/0.2pct to 7.6%/6.6% respectively, mainly due to strategic personnel adjustment and continuous increase in R & D investment of the Company. 4) Cash flow from operating activities has improved significantly. Accounts receivable of 23Q1 -3 are RMB 520 million yuan, yoy+13.6%, inventory is RMB 1.2 billion yuan, yoy+11.1%, which is caused by the increase of raw materials and product stock. Net cash flow from operating activities was 230 million yuan, yoy +101.6%, representing a decrease in payments for goods and services and part of tax expenses.

Functional skin care products face strategic adjustment pains, reshaping product series and sales channels to boost brand longevity. Influenced by external factors such as weak recovery of consumption in the past 23 years and downward expectation of residents 'income, it is estimated that Q3 revenue of functional skin care products will decrease by 30%+ year-on-year, and the four brands are expected to decline by about 20%-40%. External adverse factors push the company's skin care sector into strategic adjustment, especially after 4 years of rapid development of the skin care sector, product pipeline, new ideas, channel price control and other factors need to be reformed and sorted out. It is expected that the negative air will come out of 23H2, and the fastest 24Q1 will carry new products for gorgeous transformation.

The effect of structural adjustment of medical terminals is remarkable, and breakthroughs in multiple categories of raw materials are made. Q3 in 2023, 1) Breakthrough was achieved in multiple categories of raw materials business, and it is expected to achieve an increase of about 15%. Among them, pharmaceutical grade, cosmetic grade and food grade have double-digit growth. At the same time, breakthrough progress has been made in collagen raw materials, and high-purity ergosulfide will be successfully reduced to mass production. 2) The operating income of medical terminal business is expected to grow in double digits, with skin, orthopedics and ophthalmology going hand in hand.

The 8th hyaluronic acid "lip" filler was officially approved. Doll needle + twin needle constructed family-style layered anti-aging product matrix, and the moisturizing series increased greatly. The medical beauty business successfully stepped out of the adjustment period and re-launched. According to Q3 performance exchange data, Huaxi biological product strategy focuses on the core brand Runzhi, relying on the promotion concept of "compliance + long-term + all-inclusive" to create "medical beauty head brand", among which Runzhi micro-crosslinking increased by 148.0% year-on-year, and Runzhi filler increased by 300.0%. Moistening single-phase Natural, Moistening double-phase 2, 3 and 5 create family-style layered anti-aging, providing one-stop facial rejuvenation solutions for consumers.

The company is a platform enterprise of bioactive substances, rooted in the advantages of synthetic biology research and development, promoting hyaluronic acid raw materials + medical terminals + functional skin care products terminals + functional food terminals. It is expected that the strategic adjustment period will be smoothly passed in 23Q4, and the accumulation will be thin in 24 years. Considering that Q3 performance is slightly lower than expected and consumption recovery is weak, the growth forecast of operating income is lowered, and the profit forecast is slightly lowered. It is estimated that the net profit for 23-25 years will be 8.5/10.3/12.5 billion yuan (the original profit forecast for 23-25 years is 9.5/11.8/14.3 billion yuan), and the corresponding PE will be 43/36/30 times respectively. Maintain "overweight" rating.

Risk warning: industry competition intensifies, consumption is sluggish, compliance supervision of medical beauty plate is stricter, and cost control is less than expected.